James Montier: bank system needs a Hippocratic Oath

Esteemed author and portfolio strategist James Montier believes we could face another crisis on the same scale as 2008, unless fundamental reform takes place in the financial system.

Speaking at the CFA UK's Annual conference GMO's Montier (pictured) said 'another crisis probably of a similar ilk' represented the most 'predictable surprise' facing investors.

He said crisis would largely come as a result of a failure to address the true causes of the credit crisis - namely bad behaviour, morals, policies and incentives which have pervaded the financial system.

'Banks should be capable of failing,' he said, arguing that banks should hive off risky activities in the future.

He argues the industry and regulators alike should stop relying on flawed models, such as CAPM and VAR, commenting: 'Bad models with bad assumptions are never a substitute for common sense.'

He says the industry should move away from its dependency on maths and 'obsession with complexity' and shift towards something which is more akin to the Hippocratic oath in the medical profession. This could help to rectify the issue of bad morals, which in turn has led to poor policy by regulators and bad incentives.

'It is bad enough that we had bad models that were adopted by the regulator and then bad policy. Who came up with the concept of VAR? It was an investment bank.'

Putting forward a manifesto for change, he said: 'We have to stop defining risk by numbers, like VAR or standard deviation. It is the permanent impairment of capital. If we put this at the centre we would all be better off,' he said.

Financial services should also move away from it's tendency to reinvent the wheel, he said, and focus on the longer term.

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